Time Warner-Turner Talks : NEWS ANALYSIS : Some See a Bidding War for Turner

While Wall Street looked for signs of a possible bidding war to develop for Turner Broadcasting System Inc., Turner directors held a special meeting in New York on Wednesday to discuss the merger proposed by media giant Time Warner Inc., valued at an estimated $8.5 billion.

“Before it’s all over, we’re going to hear from General Electric in this,” said Jeffrey Logsdon, an analyst at the Seidler Cos. in Los Angeles, referring to the possibility that the owner of NBC would make another offer for Turner. “And it’s not a done deal with Time Warner. There are complex issues of responsibility, control and resource allocation to work out between the various parties.”

Few companies could rival Turner, or Time Warner for that matter, in the complexity of ownership and financial structures, making the details of a merger particularly devilish.

Time Warner, which already owns nearly 20% of Turner Broadcasting and has three seats on its board, proposed a tax-free stock swap to Ted Turner, the volatile and enterprising founder of the Atlanta-based cable company, at his ranch in Montana on Aug. 19. Both companies are looking to strengthen their positions in the consolidating media industry in the wake of the plan announced by Walt Disney Co. to buy Capital Cities/ABC Inc.

Turner would become vice chairman of Time Warner and the merger would enable Time Warner to retain its position as the world’s leading entertainment company, even after the Disney merger. Turner Broadcasting and its prized programming assets, including Cable News Network, the TBS SuperStation, the Cartoon Network and film studios, would become a wholly owned subsidiary of Time Warner, the second-largest cable operator whose assets include magazines such as Time, People and Sports Illustrated, as well as a leading movie studio, a music company and Home Box Office.

But the deal could easily fall apart. Turner has gotten cold feet about losing control of his company before, declining to sell out as recently as six months ago to General Electric Co.

Just as big a wild card, perhaps, is Turner’s other large shareholder, John Malone, the enigmatic chief executive of Tele-Communications Inc., which, as the nation’s biggest cable systems operator, is Time Warner’s chief rival. TCI also holds three Turner board seats and, like Time Warner, has the right to veto any transaction worth more than $2 million that the company undertakes.

While Malone has been interested in expanding his programming portfolio--he owns interests in two home shopping networks--it is unclear whether he would give up his leverage in Turner for a diluted interest in Time Warner. Wednesday, Malone reportedly met with Time Warner Chairman Gerald Levin and demanded long-term distribution rights to Turner’s programming for his cable systems as part of any deal.

“The pivotal player in all this is Malone,” said one television executive. “If Malone is on board, this will go through, but you just never know what Malone is thinking.”

Said another executive who knows Malone: “If you were Malone, would you rather own 20% of a second-tier studio or 8% of the world’s largest media company?”

That led to some uncertainty on Wall Street.

“There’s a lot of skittishness because there are so many unanswered questions,” said one trader. “This is being driven as much by personalities, who could change their minds on a whim, as by economic forces.”

Some investors praised the strategic and economic logic of the move, pointing out that it would help both companies better compete in a consolidating entertainment industry. What’s more, they added, it could buy time for Levin, who has been fending off restive shareholders who are angered by a stagnant stock price, a staggering debt load, a questionable cable strategy and continual management eruptions in the music division, the company’s most profitable business.

“This is Levin’s first sign of brilliance and boldness,” said Mario Gabelli, a critic of Time Warner and an investor in both companies through the Gabelli Fund. “There is a 70% probability that he will own it and a 30% chance that he will end up monetizing his stake in Turner at the highest price possible.”

The addition of Turner’s cash flow, cadre of programming assets and global positioning could reduce the pressure on Levin to shed assets quickly to pay down debt and give him leverage in negotiating a restructuring of its tangled cable partnership with US West Inc.

“That’s the single most important aspect of this deal,” said one Wall Street investor. “Their need to negotiate is less urgent, because the threat of a hostile takeover has been reduced, the mix of assets is more balanced between cable and content and the balance sheet looks better.”

Still, while Wall Street initially rewarded Disney for striking a deal with Cap Cities by trading up the stock, investors sold off Time Warner shares, which traded down 87.5 cents a share, closing at $41.375.

One concern was that a Time Warner bid would set an auction in motion--a factor that helped lift Turner shares: Class A shares soared $6.875 to a record $30.50, although they fell short of the $35-a-share purchase price Time Warner is believed to have offered. Indeed, a network owner such as GE or News Corp., which owns Fox Broadcasting Co., might still intercede. Rupert Murdoch, chairman of News Corp., has had his eye on Turner’s animation library and studio for the Fox Children’s Network, and on CNN to make Fox an authentic fourth network.

A spokesman for the company said Wednesday, “News Corp. has no interest in Turner Broadcasting.”

GE, however, reaffirmed Wednesday its continued interest in owning Turner. Some executives at NBC even suggested that the cash-rich industrial giant might make a run for the newly merged entity, pointing out that late last year GE had considered buying 49% of Time Warner, hoping to gain access to the entertainment company’s magazines, movie studios and cable programming to feed its developing on-line business, television network and CNBC cable channel.

Some sources say that both Levin and Turner see the mutual benefits of joining camps.

“For Ted, this is the price of freedom,” said one executive close to Turner. “It’s buy or be bought, and at Time Warner he’s more likely to be able to control his own destiny. Working for Levin is more acceptable for Ted than working for GE or Rupert Murdoch, his archenemy.”

The interlocking relations between Turner and Time Warner have lately hampered each company’s ability to capitalize on the media merger frenzy. Turner has been trying to assemble the $6 billion needed to make a rival bid for CBS, but has been blocked by Time Warner.